17. Derivative Liabilities

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liabilities

As discussed in Note 15 under Convertible Debts, the Company issued convertible debts with variable conversion provisions. The conversion terms of the convertible debts are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. As such, the number of shares of common stock issuable upon conversion of the debts is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion debts and shares to be issued were recorded as derivative liabilities on the issuance date.

The fair values of the Company’s derivative liabilities were estimated at the issuance date and are revalued at each subsequent reporting date, using a lattice model. The Company’s current derivative liabilities were $24,482 and $-0- at March 31, 2015 and December 31, 2014, respectively.

The change in fair value of the derivative liabilities resulted in losses of $77,110 and $793,579 for the three months ended March 31, 2015 and 2014, respectively, which has been reported as other income (expense) in the statements of operations. The loss of $77,110 for the three months ended March 31, 2015 consisted of a loss of $91,791 due to the value in excess of the face value of the convertible notes, as offset by a net gain in market value of $14,681 on the convertible debts. The loss of $793,579 for the three months ended March 31, 2014 consisted of a loss of $837,010 due to the value in excess of the face value of the convertible notes, as offset by a net gain in market value of $43,431 on the convertible debts. 

The following presents the derivative liability value by loan at March 31, 2015 and December 31, 2014, respectively:

	March 31,		December 31,
	2015		2014
Convertible notes, Magna Group I	$	–	$	–
Convertible notes, Magna Group II		24,482
Convertible debt, Blackbridge Capital		–		–
	$	24,482	$	–

The following is a summary of changes in the fair market value of the derivative liability during the three months ended March 31, 2015 and the year ended December 31, 2014:

	Derivative
	Liability
	Total
Balance, December 31, 2013	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I		124,323
Increase in derivative value due to issuances of debt, IBC Funds, LLC		1,134,927
Change in fair market value of derivative liabilities due to the mark to market adjustment		(59,346	)
Debt conversions		(1,199,904	)–
Balance, December 31, 2014	$	–
Increase in derivative value due to issuances of convertible promissory notes, Magna Group I		78,508
Increase in derivative value due to issuances of convertible promissory notes, Magna Group II		32,371
Increase in derivative value due to issuances of convertible promissory notes, Blackbridge Capital		63,278
Change in fair market value of derivative liabilities due to the mark to market adjustment		(14,681	)
Debt conversions		(134,994	)
Balance, March 31, 2015	$	24,482

Key inputs and assumptions used to value the convertible debentures and warrants issued during the three months ended March 31, 2015:

· Stock prices on all measurement dates were based on the fair market value and would fluctuate with projected volatility.

· The holders of the securities would convert monthly to the ownership limit starting at 4.99% increasing by 10% per month.

· The holders would automatically convert the note at the maximum of 3 times the conversion price if the Company was not in default.

· The monthly trading volume would reflect historical averages and would increase at 1% per month.

· The Company would redeem the notes based on availability of alternative financing, increasing 2% monthly to a maximum of 10%.

· The holder would automatically convert the note at maturity if the registration was effective and the Company was not in default.

· The computed volatility was projected based on historical volatility.

· The expected risk-free interest rate is based on the yield of the 2-year U.S. Treasury note.

· The estimated value represents the average or expected value from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 1,000 to 60,000 trials were necessary to reach the specified level of precision.

Key inputs and assumptions used to value the convertible debentures and warrants issued during the year ended December 31, 2014:

· Stock prices on all measurement dates were based on the fair market value and would fluctuate with projected volatility.

· The holders of the securities would convert monthly to the ownership limit starting at 4.99% increasing by 10% per month.

· The holders would automatically convert the note at the maximum of 3 times the conversion price if the Company was not in default.

· The monthly trading volume would reflect historical averages and would increase at 1% per month.

· The Company would redeem the notes based on availability of alternative financing, increasing 2% monthly to a maximum of 10%.

· The holder would automatically convert the note at maturity if the registration was effective and the Company was not in default.

· The computed volatility was projected based on historical volatility.

· The expected risk-free interest rate is based on the yield of the 1-year U.S. Treasury note.

· The estimated value represents the average or expected value from the Monte Carlo simulation. The simulation was specified to run until the expected value was within 1.0 percent of the true value using a 95% confidence interval. A total of 8,020,000 trials were necessary to reach the specified level of precision.